Is the Bitcoin Group Limited IPO a guaranteed multi-bagger?

Investor interest in alternative financial businesses has skyrocketed in the past few years, as developments such as Peer-to-Peer lending and Bitcoins have grabbed headlines across the globe.

Directmoney Ltd(ASX: DM1)listed on the ASX back in July, Trade Me Group Ltd(ASX: TME) bought a big chunk in NZ peer-to-peer lender Harmoney, and Westpac Banking Corp (ASX: WBC) has exposure to the sector through its stake in SocietyOne.

Now, Australia (and the world) is getting its first listed Bitcoin trader, in the form of Bitcoin Group Limited(ASX: BCG), which recently released its prospectus to interested investors. I’ll dig into the meat of the offering further down the page, but here’s a broad outline:

100,000,000 shares to be issued at $0.20 each

Afterwards, there will be a total of 164,870,930 shares on issue including existing shares (market cap of ~$32m)

Management to own 9.2% of the company, with the public owning 60.7% and remainder owned by significant investors

Minimum investment $2,000

Offer closes 30 October

Purpose of the offer is to fund growth and increase working capital, as well as repay small director loans

So What?

To their credit, Bitcoin Group has presented a comparatively straightforward and easy to understand prospectus, which is necessary given the largely uncharted territory it is asking people to invest in.

In short, the company uses specialised computer processors to ‘mine’ Bitcoins by solving time-consuming and processor-intensive equations. When an equation ‘block’ is solved, the solver (Bitcoin Group) receives a bounty of 25 Bitcoins. This bounty halves – called ‘Block Halving’ – every 210,000 blocks, and is expected to drop to 12.5 Bitcoins around July 2016.

More processing power will result in Bitcoins being earned faster, however, the difficulty of the equation is recalculated every 2,016 blocks, so that the previous 2,016 blocks would have taken exactly two weeks had everyone been mining at this difficulty. Bitcoin Group can get ahead of the curve if it adds processing power faster than the market average.

According to management, this reflects a fixed market opportunity of 108,000 Bitcoins per month, roughly $35m at today’s prices – at least until ‘Block Halving’ occurs or the value of Bitcoins change. By my calculations, 2,016 blocks every two weeks is 4,032 blocks per month, or 100,800 Bitcoins per month (at 25 coins per block). I am uncertain if this reflects an error in my calculations or a typo in the prospectus.

Bitcoin Group produces approximately 1.57% of the global mining output, or roughly AU$550,000 per month. Although incorporated in September last year, the Group did not commence operations until the beginning of 2015 and earned AU$1.7m in the year to 30 June 2015. $431,000 of this came out as Gross Profit, from which other expenses are subtracted, leaving $69,000 as comprehensive income for the group.

The Risks

As readers can see, only a small portion of earnings came out as profits, and much of that was in the form of ‘fair value gains’ on Bitcoin valuations. It is uncertain how much faster profits will scale up compared to costs as the business grows.

Management intends to operate by using Bitcoins for goods and services wherever possible, and will use earnings to reinvest in further Bitcoin Mining apparatus. There are no dividend plans in place. Given that the number of Bitcoins received from mining halves every four years, management would appear to be investing heavily into a shrinking source of income.

However, the value of these mining activities depends on the relative value of Bitcoins, which has been known to fluctuate wildly and, at AU$337 each, is below the AU$400 target figure used by management in the prospectus.

Management also notes that the actual value of Bitcoins usually rises when ‘Block Halving’ occurs, although it seems likely that other factors such as the demand for Bitcoins will play a part. Increasing public usage of Bitcoins will be required to maintain value (given a constantly increasing supply of currency), though there is the potential for massive increases in value (given that only 100,000 are created per month) if they are adopted wholesale.

Another major risk is the fact that the amount of processing power in the market could reasonably be expected to rise over time, yet the actual amount of Bitcoins created will remain constant. I believe this could result in perpetual heavy capital investment on behalf of Bitcoin Group. It could still be a winning business model, but much depends on the value of Bitcoins over time.

It is also worth noting that the vast majority of the company’s business is conducted in China through a wholly-owned subsidiary and Australian-listed Chinese companiesdo not have a sterling reputation for business. While it may be unfair to tar Bitcoin with this brush, it is something to be aware of.

Now What?

I could go on for several pages detailing on the ‘what-ifs’ and risks associated with an investment in Bitcoin Group. Due to space limitations I can’t, but I highly recommend interested investors do their own research into Bitcoin mining, the history of Bitcoin, Bitcoin value, and economic circumstances that affect the value of Bitcoins. A brief refresher course on how currencies work would be valuable, and reading the entire prospectus should be considered mandatory.

Until the company builds up more of a track record, Bitcoin Group looks too risky to be any more than a tiny stake in an investor’s portfolio.

With the ASX gyrating wildly, some experts are predicting a market crash...

Is a share-market crash REALLY coming? Get our analysts' exclusive inside take now, in The Motley Fool's newly updated report, "What to Do When the Sharemarket Crashes" -- including expert tips on how to protect YOUR portfolio.

Simply click on the link, enter your email address, and we'll send you our full coverage for free - no credit card details or payment required!

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Investor interest in alternative financial businesses has skyrocketed in the past few years, as developments such as Peer-to-Peer lending and Bitcoins have grabbed headlines across the globe.

Directmoney Ltd (ASX: DM1) listed on the ASX back in July, Trade Me Group Ltd (ASX: TME) bought a big chunk in NZ peer-to-peer lender Harmoney, and Westpac Banking Corp (ASX: WBC) has exposure to the sector through its stake in SocietyOne.

Now, Australia (and the world) is getting its first listed Bitcoin trader, in the form of Bitcoin Group Limited (ASX: BCG), which recently released its prospectus to interested investors. I?ll dig…

CLAIM YOUR FREE SUBSCRIPTION NOW

What's REALLY going on in the share market...and what do we think is the BEST and SAFEST way to make some money right now? Discover our experts' take on the ASX with your FREE subscription to The Motley Fool Australia's weekly email Take Stock...

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.

Fools on Facebook

To keep reading, enter your email address or login below.

Enter your email below for FREE access to this article and all the content on the site. Also receive Take Stock, The Motley Fool's unique daily email on what's really happening with the share market. You may unsubscribe any time.

Satisfaction Guaranteed!

The Motley Fool stands behind our products and our membership-fee-back guarantee. If for any reason you are not 100% satisfied with your premium subscription, simply notify us within the first 30 days and you won’t pay a cent.

Automatic Renewal

By taking up this offer, you will also be enrolled in our auto-renewal program, which is our way of making your ongoing subscription easier by ensuring uninterrupted service. Don’t worry, though – you’re not locked in, and can cancel your auto-renewal at any time before each ‘anniversary’ date without question or penalty.

We love you, but we need to talk. It's your browser. Internet Explorer 8 (or older) has known security flaws, and may not display all of our Foolish website's features – or those of other websites, for that matter. We encourage you to use the following link to update your browser so that you can more safely browse the Web (http://browsehappy.com/).